1. PURPOSE

To inform the Portfolio Committee about the business plan for a review of the governance framework of all non-business public entities and government business enterprises operating at the national sphere of government.

2. BACKGROUND

1. Problem statement:

After several years of establishing public entities, government realised the following weaknesses in them:

1. Most of the public entities were created in terms of their own legislation that has led to fragmentation of regulatory frameworks, accountability frameworks, conditions of service and service delivery. In some instances, this has also resulted in duplication and weakness in a range of management systems such as ineffective and inappropriate accounting practices, corporate governance practices, and human resources management and procurement practices.
2. Lack of a coherent public sector regulatory framework undermines the existence of a single public service as a constitutional requirement. It makes the restructuring of the public sector, in particular the transfer of functions and staff, cumbersome. It inhibits the free movement of staff due to incompatibility of respective regulatory frameworks, including remuneration frameworks and pension dispensations.
3. In developing the business case, the following apparent problems were also noted:

• Governance arrangements proposed in the King Code are not adequately internalised by some public entities. This inadequacy can result in reporting lines not being clearly defined with principal departments and service level agreements not being adhered to.
• From a governance perspective, the enabling acts together with the PFMA (and related Treasury Regulations) are not providing the necessary details or guidance for some entities. This lack of detail may result in inconsistent interpretation of regulations by public entities.
• There appears to be some public entities with no clear reason for separation from national departments. Others may be performing duplicate functions or pursuing objectives that are not in line with the specified mandate.
• There is no standardised grading and remuneration system for staff. This results in inconsistencies regarding remuneration, which in turn creates unfairness in the public service system.
• Procurement procedures are sometimes not transparent, equitable or fair. There may be little regard to the Preferential Procurement Policy (PPP) and therefore a compromise of government priorities such as small business development.
• The current classification framework in terms of schedules 2 and 3 of the PFMA may no longer be sufficient to current public service challenges. The number of public entities have increased to an extent that they require an updated classification framework to ensure they do not overlap in terms functions.

1. Purpose of the review:

1. In July 2002, Cabinet approved the joint appointment of the Department of Public Service and Administration (DPSA) and the National Treasury (NT) to conduct a governance framework review of all non-business public entities and government business enterprises, operating at the national sphere of government. The primary objective of the governance framework review is to design a coherent regulatory framework supported by sound governance practices.
2. This review aims to achieve a coherent regulatory framework between the public service and the public entities at national level. This supports the principle of creating a unified (although not uniform) machinery of government in line with the Constitutional values and principles governing public administration. Such a regulatory framework would contain the broad principles, and provide minimum norms and standards on issues such as accountability, effective financial management and systems, governance practices, and human resource practices. The regulatory framework will allow for flexibility and differentiation, because public sector institutions are not all the same.
3. The review, to be performed by the National Treasury and the DPSA with the support of the respective national governing departments, is expected to address the following substantial issues:

• Develop a criterion for the classification of public entities and for an assessment of proposals relating to the creation, restructuring, merger or closure of entities, to enhance service delivery using optimal resources.
• Assess the role of public entities in their current corporate form with a view to harmonising and making effective government systems.
• Review and propose appropriate corporate governance practices and guidelines that enable compliance with the PFMA and related regulations / legislation, with specific focus on improving:

• The quality of accounting arrangements;
• The management of human resources including performance management and remuneration; and
• The fairness / transparency of procurement procedures.

• Review the appropriateness of the regulatory frameworks for the public sector in relation to public entities, including the PFMA, the Public Service Act and the various enabling acts, and propose amendments.

1. The review is expected to achieve the following outcomes:

• Improve classification framework (Definition, Types).
• Assess the role of PEs in their current corporate form.
• Develop preferred corporate forms - Sect 21 companies, Trusts.
• Make proposals for PEs to evolve to new corporate forms.
• Improve corporate governance, accounting arrangements and fairness of procurement procedures.
• Improve Performance Management and HRM.
• Performance management at corporate and staff levels.
• Grading, remuneration, fringe benefits for board members and staff.
• Collective bargaining arrangements.
• Review the appropriateness of regulatory frameworks in relation to PEs and propose amendments.

1. Scope:

1. For the sake of good corporate governance and to facilitate the implementation of the PFMA, the public entities are currently classified into the following categories:

• Schedule 2: Major Public Entities (Airports Company, DENEL Telkom, Transnet); and
• Schedule 3: Other Public Entities, which comprise -

1. As at 28th February 2003, the recorded number of public entities totalled 336. Although the number of public entities excludes subsidiary entities under the ownership control of the public entities, these entities will also be subject to the review. For the 2003 / 2004 financial year, national government voted approximately R15 billion towards these entities.
2. For purposes of the review, a public entity as defined in the PFMA, refers to:

• A public entity or government business enterprise at the national sphere of Government, listed in terms of Schedules 3A and 3B of the PFMA;
• Any subsidiary or entity under the ownership or control of the above-mentioned public entities;
• Any non-listed board, council, commission, company, corporation, fund or other entity that receives funding from the National Revenue Fund (e.g. transfer payments), or by way of tax, levies or other money imposed in terms of legislation; and
• Companies and Section 21 (not for profit) companies, trading entities and trusts established by Departments or public entities.

Constitutional institutions and commissions / committees of inquiry are excluded from this review.

1. PROJECT APPROACH AND ORGANISATION

1. All stakeholders are involved:

The review process proposed is interactive, participative and consultative, inviting participation from all internal stakeholders who are involved in the entities and have a detailed understanding of the mandates of the public entities and the respective governing departments. This also serves to facilitate buy-in from the relevant stakeholders and manage concerns that may surface during the implementation of the preferred options.

2. DPSA and NT have been mandated to conduct the review:

1. Establishing a joint DPSA / NT project steering committee to oversee

programme execution.

2. Establishing a project management office. The office operates from

National Treasury offices and is co-managed by project managers from

DPSA and NT.

3. The review project is divided into two phases namely.

• Creation of a data gathering work-stream, responsible for gathering information for analysis by the relevant specialist teams;
• Creation of a review of the classification framework work-stream to review the suitability of the current classification framework and to propose a more effective framework;

• Creation of the following four specialist teams, comprising representatives from the DPSA / NT and the governing national departments with the support of consultants:

• Review of corporate status team;
• Review of legislation team;
• Performance management and remuneration team; and
• Corporate governance team including accounting / technical and procurement.

1. Establishing an inclusive project team that comprises members from the National Treasury, the DPSA, the governing national departments and consultants. Private sector support includes local and international service providers.
2. Developing a communication strategy, identifying all internal stakeholders and communication methods to ensure maximum co-operation, transparency, consultation, information dissemination and accountability.

1. PROGRESS TO DATE

• The required consultants for all workstreams have been appointed;
• Data collection from departments and public entities has been completed and is being compiled into a final report. The report will serve as input for phase 2 workstreams;
• International research for classification frameworks has been started. The researchers were advised to look at both developed and developing countries (including some African countries); and
• Phase 2 workstreams started in January 2004 and are in the project set-up stage.

1. COMMUNICATION PLAN AND STAKEHOLDER MANAGEMENT

• A letter has been sent to the labour partners (NEDLAC and PSCBC) to inform them of the process;
• The Portfolio Committee, Ministers, Cabinet, MECs and social partners will be kept informed of progress through meetings, submissions, and cabinet memos. The Project Steering Committee will conduct this exercise when reaching project milestones;
• The Project Steering Committee will submit its findings and proposals through DPSA / NT / relevant department to the Executive, and then to Cabinet for approval; and
• Provincial entities will be reviewed following a separate process after liaison with relevant stakeholders. The provincial process will leverage lessons leant from the current project. The timelines for provincial entities have not been determined and are currently viewed as provincial governments’ prerogative.

1. WAY FORWARD

• Follow-up communication sessions with key stakeholders on the progress of the project and deliverables;
• Review of deliverables to ensure quality and value-add;
• Compile a closure report at the end of the project for submission to the Ministers, Cabinet, Portfolio Committee and other interested stakeholders; and
• Encourage Provincial governments to review of Provincial entities in co-operation with provincial stakeholders.

1. CONCLUSION

• The success of this project may lead to improved corporate governance which turn will lead to better service delivery in line with Batho Pele. It will support government to meet its priorities such as poverty alleviation;
• Government will also be making a step towards fulfilling its NEDLAC commitments in relation to the Growth and Development Summit (GDS); and
• An improved public service corporate governance could attract foreign direct investment and thus help stimulate the South African economy.

PREPARED BY THE DEPARTMENT OF PUBLIC SERVICE AND ADMINISTRATION

26 January 2004